As an agency, one of the most common questions we get when a family calls us to hire a nanny is “what are the extra costs involved.” One of the costs that many employers may not know about is something commonly referred to as the “Nanny Tax.”
What is the Nanny Tax?
The Nanny Tax is a federal tax that includes a combination of employment taxes paid by the employer, as well as payroll taxes that are withheld from the employee. Is the Nanny Tax only for nannies? No! This tax applies to all domestic workers, including but not limited to housekeepers, cooks, butlers, domestics couples, and anyone else who makes $2,200 or more a year per individual. The government considers these employees to be ongoing household employees and not independent contractors. The Nanny Tax qualifies these employees for unemployment benefits (should anything happen), Social Security, and Medicare.
What steps are required to comply with (most states) Nanny Tax laws?:
- Employers must create a tax account with the IRS and get an Employer Identification Number. This step includes having every employee fill out an I-9 form.
- Withhold FICA taxes (Social Security & Medicare) from each paycheck- employers and employees share these expenses at a rate of 15.3% (7.65% each) so 7.65% will be withheld from the employee’s paycheck.
- As required by each state, the employer must file unemployment insurance and income tax returns.
- Provide the employee with a W-2 form by January 31st and file a W-2 Copy A and W-3 with the Social Security Administration.
- File a Schedule H form when they file their personal income taxes.
Hiring an employee can be a big step and we recommend doing your research before you bring someone on board.
We understand that it may be difficult to handle taxes and payroll on your own, especially when you want to make sure that you are doing everything by the book! If this is the case, finding a third party to assist with your needs may be the solution for you. Our partners at Pavillion Agency do offer payroll services, so they can do the heavy lifting for you. If you feel you may need help, feel free to reach out to us today.